In: Finance
Badger Corp. has an issue of 6% bonds outstanding with 6 months left to maturity. The bonds are currently priced at $993.54, and pay interest semiannually. The firm's marginal tax rate is 40%. The estimated risk premium between the company's stock and bond returns is 6%. The firm's expects to maintain a capital structure with 40% debt and 60% equity going forward. The company's W.A.C.C. is ____%. Round your final answer to 2 decimal places (example: enter 12.34 for 12.34%), but do not round any intermediate work in the process. Margin of error for correct responses: +/- .05.
K = Nx2 |
Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k] + Par value/(1 + YTM/2)^Nx2 |
k=1 |
K =0.5x2 |
993.54 =∑ [(6*1000/200)/(1 + YTM/200)^k] + 1000/(1 + YTM/200)^0.5x2 |
k=1 |
YTM% = 7.34 = cost of debt |
Cost of equity = cost of debt + risk premium = 7.34+6 = 13.34%
Weight of equity = 1-D/A |
Weight of equity = 1-0.4 |
W(E)=0.6 |
Weight of debt = D/A |
Weight of debt = 0.4 |
W(D)=0.4 |
After tax cost of debt = cost of debt*(1-tax rate) |
After tax cost of debt = 7.34*(1-0.4) |
= 4.404 |
WACC=after tax cost of debt*W(D)+cost of equity*W(E) |
WACC=4.4*0.4+13.34*0.6 |
WACC =9.76% |